The ACMA

Media control rules no barrier to Foxtel/Ten deal

The Australian Communications and Media Authority today confirmed it is satisfied, at this time, that the proposed arrangements between Foxtel Management Pty Ltd (Foxtel) and Ten Network Holdings Ltd (Ten) will not contravene the media diversity and control rules in the Broadcasting Services Act 1992 (the BSA), based on the information currently available to it.

‘The principal issue considered by the ACMA was whether the arrangements would put Mr Lachlan Murdoch in a position to exercise control of commercial television broadcasting licences held by Ten,’ said ACMA Chairman, Chris Chapman.

‘If so, an “unacceptable 3-way control situation” would result in the four licence areas where Mr Murdoch is already in a position to control the Nova commercial radio broadcasting licences and the News Corporation associated newspapers.

‘However, the ACMA considered that, while Mr Murdoch was in a position to exert influence on Ten, that level of influence fell short of “control” as prescribed by the BSA.’

The ACMA looked at the question of control under the BSA, both from:

a ‘deemed control’ perspective - whether on completion of the proposed arrangements, company interests in Ten controlled by Mr Murdoch would exceed 15 per cent thereby putting him in a position of ‘deemed’ control of Ten; and

an ‘actual control’ perspective – whether arrangements or relationships would put Mr Murdoch himself, or together with an associate, in a position to control Ten.

It considered submissions and other relevant information provided either voluntarily or in response to a significant number of formal notices given under section 173 of the BSA.

On ‘deemed control’, it is clear on the information currently available to the ACMA that the company interests controlled by Mr Lachlan Murdoch in Ten through his private investment company and his traced company interests through Foxtel’s proposed shareholding in Ten would not exceed 15 per cent.

On ‘actual control’, the ACMA considered the proposed arrangements between Foxtel and Ten, as well as Mr Murdoch’s connections with Ten:

through his private investment company;

in his role as Non-Executive Co-Chairman of News Corporation;

in his role as Executive Chairman of 21st Century Fox; and

through various potential ‘associate’ relationships.

The ACMA’s views are based on the information available at this time and the evidence before it. It will continue to monitor the relationship between Mr Murdoch and Ten to ensure ongoing compliance with the diversity and media control rules.

Backgrounder

Foxtel/Ten proposed arrangements

On 15 June 2015, Ten announced that it had entered into binding agreements with Foxtel Management Pty Limited as agent for the Foxtel Partnership (Foxtel), and Multi Channel Network Pty Ltd (MCN) with a view to implementing a series of transactions (the proposed arrangements).

The key elements of the proposed arrangements are:

the issue of new shares to Foxtel making Foxtel no more than a 15 per cent shareholder in Ten;

a Foxtel representative to join the Board of Ten, which upon completion of this transaction will be reduced to six directors;

the appointment of MCN as Ten’s sales representative (with MCN to commence sale of Ten advertising from 1 September 2015);

Ten to become a 24.99 per cent shareholder in MCN;

Ten to have an option for two years to become a 10 per cent shareholder in online streaming service Presto (a joint venture between Foxtel and Seven West Media). Ten will also enter into a separate program licence agreement to supply content to Presto.

The ACMA monitors and enforces compliance with the rules for media control set out in the BSA.

The statutory tests applied by the ACMA are specific to the BSA and different from those to be applied by the Australian Competition and Consumer Commission under the Competition and Consumer Act 2010.

Control under the BSA

The concept of control under the BSA is specific to determining whether a person is in a position to exercise control of a broadcasting licence or newspaper.

The means of determining control are set down in the BSA and can be broadly categorised as:

1. control through company interests (referred to as ‘deemed’ control); and

2. control through agreements and arrangements between people and accustomed courses of conduct between people (referred to as ‘actual’ or ‘de facto’ control)

Deemed control – 15 per cent rule

If a person/company has a company interest in a company exceeding 15 per cent, then that person/company is deemed to be in a position to exercise control of the company.

A company interest includes a shareholding interest, a beneficial, voting, dividend, or winding up interest.

Relevantly, in relation to a voting interest, a person must be able to direct or restrain how that voting interest is exercised in order for that interest to be attributed to them.

In this case, the ACMA was not satisfied, on the information available, that Mr Lachlan Murdoch could control Foxtel’s voting interest in Ten (of just under 15 per cent). As a result, that voting interest cannot be attributed to him.

The ACMA noted that Mr Murdoch’s company interests in Ten (if the transaction is completed) will be derived from his 8.52 per cent shareholding in Ten held via his Illyria investment group (Illyria), and company interests traced through Foxtel and the chain of companies to News Corporation, in which Mr Murdoch holds a small company interest. The fractional tracing method is applied to these traced interests as required under the BSA. On this basis, the ACMA was satisfied that Mr Murdoch’s company interests in Ten will not exceed 15 per cent.

Actual or de facto control

In this context, control encompasses a range of conduct, situations and relationships where a person is considered to be ‘in a position to exercise control’, either alone or together with an associate in a manner that does not simply depend on company interests.

‘Control’ of a company in this context means the power to direct or restrain what a company may do on any substantial issue [1].

Control may be contrasted with mere guidance, instruction or advice, or with persuasive influence, which would not constitute control [2].

Specific circumstances in which a person may be found to be in a position to exercise control of a company or licence are found in Schedule 1 to the BSA and relevantly include where a person can:

control a significant proportion of the entity’s operations;

control the selection or provision of a significant proportion of material programmed or published;

veto any action taken by the board or secure at least 50 per cent of the board appointments; or

exercise direction or restraint over any substantial issue affecting the entity’s management/affairs.

Associates

A person can control a company, licence or newspaper through an associate relationship, i.e., where the person ‘together with an associate’ controls the company, licence or newspaper. The definition of ‘associate’ includes, for example, a spouse, parent or child, a person who acts in accordance with the directions of the first person, and a related company. However, persons are not associates if the ACMA is satisfied that they do not act together in any relevant dealings relating to that company, licence or newspaper; and neither of them is in a position to exert influence over the business dealings of the other in relation to that company, licence or newspaper.

Unacceptable 3-way control situation

Under section 61AEA of the BSA, an unacceptable 3-way control situation exists in relation to a commercial radio broadcasting licence area if a person is in a position to exercise control of:

a commercial television broadcasting licence;

a commercial radio broadcasting licence; and

a newspaper associated with a radio licence area.

Any person who is a party to the transactions that result in this situation coming into existence, or who is or was in a position to prevent the transactions from taking place, may be in breach of sections 61AMA and 61AMB of the BSA.

Mr Murdoch is currently listed as being in a position to exercise control of the Nova commercial radio broadcasting licences in the Sydney RA1, Melbourne RA1, Adelaide RA1 and Brisbane RA1 licence areas. He is also in a position to exercise control of the News Corporation associated newspapers.

If he was also in a position to exercise control of the commercial television broadcasting licences controlled by Ten, an ‘unacceptable 3-way control situation’ would come into existence in those four commercial radio broadcasting licence areas. This would be in breach of sections 61AMA and 61AMB of the BSA.

Major areas considered by the ACMA

The ACMA considered whether Mr Murdoch is currently in a position to exercise control of Ten, or will come into such a position as a result of the proposed arrangement between Foxtel and Ten.

The major issues considered by the ACMA related to:

Company interests in Ten: whether Mr Murdoch’s company interests in Ten through Illyria and through Foxtel, exceed 15 per cent, putting him in deemed control of Ten under clause 6 of Schedule 1 to the BSA.

Proposed arrangements between Foxtel and Ten: whether any of the proposed arrangements between Foxtel and Ten will put Mr Murdoch in a position to exercise control of the Ten licences.

Ten’s Board: whether under clause 2(1)(e) of Schedule 1 to the BSA, over 50 per cent of directors on the current Board of Ten or the Board as it will be composed on completion of the proposed arrangements, act, or are accustomed to act, in accordance with Mr Murdoch’s directions, instructions or wishes, or in concert with Mr Murdoch.

Major shareholders: whether Mr Murdoch could be in a position to veto any action, appoint directors or exercise direction or restraint over any substantial issue affecting the management of affairs of Ten or the Ten licences in the terms in clause 2(1)(d)(i)-(iii) of Schedule 1 to the BSA by combining his shareholding with the shareholdings of any of the major shareholders.

Ten’s management: whether a management culture exists, or will exist at Ten such that Mr Murdoch is in a position to direct or restrain what Ten may do in respect of a substantial issue affecting the management and affairs of Ten in terms of clause 2(1)(d)(iii) of Schedule 1 to the BSA, or can control a significant proportion of the operations of the business in terms of clause2(1)(b)(ii), though his relationship with senior management at Ten.

Programming agreements: whether Mr Murdoch can control the selection or provision of a significant proportion of the programs broadcast by Ten licensees in terms of clause 2(1)(b)(iii).

Position as a guarantor of the Commonwealth Bank of Australia (CBA) loan facility: whether the arrangements by which Mr Murdoch (via Illyria) is a shareholder guarantor of Ten’s $200 million loan facility put him in a position to control Ten.

Cumulative effect: whether under clause 2(1)(a) of Schedule 1 to the BSA, Mr Murdoch will be in a position to exercise control of the Ten licences via the cumulative effect of the various matters listed above.

The ACMA also considered whether Mr Murdoch had an associate relationship with any other relevant party in relation to Ten’s commercial television licences.

The ACMA has considered information provided by Foxtel and Ten on a voluntary basis, as well as submissions provided by other parties voluntarily or following informal requests by the ACMA for information about the proposed arrangements. The ACMA also considered information provided in response to formal notices to provide information (issued under section 173 of the BSA) issued to a number of people, including current and former directors and executives of Ten.

The ACMA acknowledges that the matters mentioned above, being the means by which Mr Murdoch may be able to influence Ten, are matters that are important to Ten’s business, namely, decision-making at the Board and shareholder level, Ten’s revenue-generating potential through programming and advertising, and its financial security through the guarantee of the CBA loan facility. However, the ACMA was of the view that none of these matters individually put Mr Murdoch in a position to exercise control of Ten or its licences.

The ACMA was also of the view that while the combination of Mr Murdoch’s shareholding, representation on the Ten Board, his role as a shareholder guarantor and his roles at News Corp and 21st Century Fox, would give Mr Murdoch a measure of influence over Ten’s business, it fell short of him being in a position to control Ten or its licences under the terms of the BSA.